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Pioneer Forced to Wait for Regulators on Plan for Paying Brokers

Wednesday, September 23, 2015

Pioneer Forced to Wait for Regulators on Plan for Paying Brokers
2015-09-17 09:42:56.916 GMT

By John Detrixhe
     (Bloomberg) -- Pioneer Investment Management thinks
Europe’s looming ban on bundling together payments for equity
research and trading is a great idea. But uncertainty over what
will be allowed in the final rules has forced it to stop its
efforts to separate the two.
     “It is long overdue,” said Gianluca Minieri, Dublin-based
global head of trading at Pioneer, which manages $244 billion.
“We had to stop because of a lack of clarity.”
     At the moment, fund managers pay their brokers for research
and trading through one fee, the trading commission. Critics say
it’s difficult to tell how much the customer pays for each
service. The European Commission, the executive arm of the 28-
nation European Union, wants to make those costs more
transparent, but it has yet to say whether it will permit
existing methods of separating payments, such as those used by
Pioneer, to continue.
     The proposed ban on bundling payments to brokers is one of
the most contentious proposals in an EU-wide overhaul of
financial regulations called MiFID II. The rule change, which
comes into force in 2017, would disrupt the business model that
investment banks use to profit from equity markets. Indeed,
greater transparency may make some bank operations less

                       Inferior Execution

     MiFID II will hit asset managers too. Their clients pay the
research and trading fees. The EU proposals require that
analysts’ notes be paid for from an account owned by the fund
manager or from a client-funded account dedicated to paying for
     Under the current system, a money manager that doubles its
trading volume could also increase how much its pays for
research, regardless of whether it uses more research. Another
criticism is that a fund might opt for inferior trade execution
because it wants that broker’s research.

                       ‘Poor Quality’

     “The problem perceived by regulators is that you could be
executing with someone just because you get their research,”
said Anish Puaar, European market structure analyst at
Rosenblatt Securities Inc. “Because of this bundled system,
you’re compelled to trade with them perhaps even if they’re
giving you poor execution quality.”
     Pioneer pays for research through a commission-sharing
agreement. Such arrangements allow money managers to direct
their brokers to transfer money to a third firm to pay for
research. The company, which is owned by Italian bank UniCredit
SpA, started a project last year to set up CSAs for all its
European businesses. After learning in December, however, that
the arrangements may be banned entirely, it put its plans on
     The asset manager is also developing new ways to value and
budget for research. That will probably mean reducing, or at
least re-allocating, spending to a smaller number of research
     The European Securities and Markets Authority, the EU’s
markets regulator, is expected later this month to rule whether
CSAs do enough to separate payments. The commission, meanwhile,
may publish the final rules for MiFID II this autumn.

                   ‘Conflict of Interest’

     Earlier this month, the German, French and British finance
ministries wrote a letter to the commission, calling on it to
water down the proposals on trading payments. Some national
regulators are taking a different stance. The U.K.’s Financial
Conduct Authority has said the current system contains an
“inherent conflict of interest” because fund managers’ clients
bear the cost of research that is difficult to value.
     Pioneer reckons that greater separation between research
and trading payments will make asset managers more selective
when they choose research. The downside is that smaller asset
managers may not be able to afford the best analysis, and
smaller companies may get less attention from analysts, making
it harder for them to raise capital from equity markets.
     UniCredit’s fund-management business isn’t the only one
trying to prepare for the new rules, though few firms have been
public about their plans.

                          Nomura, UBS

     Nomura’s agency broker Instinet Europe has won approval
from the FCA to run separate client accounts for trade payments
and research payments, while Swiss bank UBS Group AG is
developing a new pricing model for its research. Brokerage-
services provider Convergex Group LLC is looking to adapt its
offerings to the new regulations. Like Pioneer, the firm is
awaiting further details from Brussels.
     “Different asset managers are making decisions right now
depending on their circumstances,’’ said Adam Toms, chief
executive officer at Instinet Europe in London. “Our view is
that existing CSA structures can be augmented to deal with the
residual concerns of regulators and that’s what we would like to
see happen.’’

For Related News and Information:
EU Securities Revamp Risks Market Damage, Germany, U.K. Say (1)
Banks Set to Win Softening of Planned EU Research Payment Rules
Top Stories: TOP
Top European News: TOP EUR
Market Structure News: NI MKST

To contact the reporter on this story:
John Detrixhe in London at +44-20-3525-9807 or
To contact the editors responsible for this story:
Nick Baker at +1-312-443-5942 or
Will Hadfield

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